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1 Apr 2015
Prospects for GBP keep on the negative side – JP Morgan
FXStreet (Edinburgh) - In the opinion of analysts at JP Morgan, the negative stance could prevail in the sterling.
Key Quotes
“Selling the pound is a relatively high conviction trade for us due to intersection of low inflation that’s pressured UK rate expectations and the potential for high political drama surrounding the May 7th general election”.
“It’s probably fair to say that UK rate expectations have now fallen about as far as they are going to go (5Y rates have dropped by 25bp relative to the G10 average since earlier in the month), not least because the curve is now so flat (no hike before end-2016 and a terminal base rate of around 1.75%) that a further flattening is unlikely without the strong risk of the BoE actually cutting rates again (MPC members with the exception of Haldane have insisted that the next move in rates is still more likely to be up despite CPI falling to 0%)”.
“But a floor in rates need not translate to a floor in GBP. For one thing sterling remains substantially overvalued relative to where interest rate differentials actually are, so GBP can weaken even if the BoE isn’t at all minded to ease policy”.
“Secondly, the general election remains as difficult to call as ever, not only in terms of the possible distribution of seats (the opinion polls show that the popular share of the vote is stuck around 1/3 Conservative, 1/3 Labour and one-third other), but also the very uncertain party political calculations (tactical and strategic) that will shape the post-election horse-trading in the highly probable event of an indecisive, hung parliament”.
Key Quotes
“Selling the pound is a relatively high conviction trade for us due to intersection of low inflation that’s pressured UK rate expectations and the potential for high political drama surrounding the May 7th general election”.
“It’s probably fair to say that UK rate expectations have now fallen about as far as they are going to go (5Y rates have dropped by 25bp relative to the G10 average since earlier in the month), not least because the curve is now so flat (no hike before end-2016 and a terminal base rate of around 1.75%) that a further flattening is unlikely without the strong risk of the BoE actually cutting rates again (MPC members with the exception of Haldane have insisted that the next move in rates is still more likely to be up despite CPI falling to 0%)”.
“But a floor in rates need not translate to a floor in GBP. For one thing sterling remains substantially overvalued relative to where interest rate differentials actually are, so GBP can weaken even if the BoE isn’t at all minded to ease policy”.
“Secondly, the general election remains as difficult to call as ever, not only in terms of the possible distribution of seats (the opinion polls show that the popular share of the vote is stuck around 1/3 Conservative, 1/3 Labour and one-third other), but also the very uncertain party political calculations (tactical and strategic) that will shape the post-election horse-trading in the highly probable event of an indecisive, hung parliament”.